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Ge's Money Machine

March 07, 1993

Cover Story

GE'S MONEY MACHINE

Sears. ITT. Xerox. Westinghouse. All proud names of Corporate America that rushed eagerly into the promised land of financial services in the 1980s. Lured by tantalizing returns, they amassed large positions in real estate lending, consumer finance, and corporate buyouts. Now, battered by severe losses, those adventurers are retreating, anxious to limit exposures and get back to their basic businesses.

Except for General Electric Co. The maker of jet engines, light bulbs, and home appliances is enjoying incredible benefits from its finance arm. During the recent recession, when GE's more cyclical businesses stalled, GE Capital Services Inc., formerly GE Financial Services, was a veritable money machine. In five years, the unit's assets have more than doubled, to $155 billion. GE Capital is now the engine driving its parent's profits: Its share of GE's earnings surged from one-fifth to one-third. Unlike its hapless competitors, GE Capital handily overcame losses in real estate and leveraged buyouts, posting record earnings of $1.5 billion in 1992.

The global scope of GE Capital today is a far cry from its humble beginnings in the Depression, when GE's credit operation got its start financing refrigerators. Its portfolio of nearly two dozen discrete businesses extends to almost every corner of the world of finance. GE Capital provided a $100 million loan for the recapitalization of the Six Flags amusement park chain and reinsured the performance bond for Toronto's Skydome. It has issued 65 million credit cards to customers of retailers, including R. H. Macy & Co. and Montgomery Ward & Co. It owns and operates the nation's second-largest reinsurer, Employers Reinsurance Corp. Its auto-leasing fleet, No. 1 in the U. S., is growing at a 15% annual clip. It is the world's largest lessor of oceangoing shipping containers and the largest private mortgage insurer. It has been one of the most aggressive purchasers of troubled property seized from banks and thrifts. And it owns a large Wall Street brokerage, Kidder, Peabody & Co.

While other companies' financial arms are pulling back, GE Capital is expanding rapidly. It snapped up $5 billion in new assets last year alone. And it's off to a fast start in 1993. In January, it bought the $3.2 billion annuity and mutual fund business of GNA Corp. from Weyerhaeuser Co. for $525 million as a way to expand into peddling investments to aging baby boomers. Its bargain hunters have been scrutinizing the books at troubled Westinghouse Credit Corp. (page 6842) and eyeing the $2.25 billion real estate portfolio of First Chicago Corp.

NUTS AND BOLTS. GE Capital is pushing ahead globally, too. It bought Harrods' credit-card portfolio and Barclays Bank's auto-loan business last year. It picked up Avis Lease's $1 billion European auto-fleet business and a 3% stake in Spain's Banco Bilbao Vizcaya. And in December, it launched a joint venture with Malaysia's UMW Corp. to provide financial services.

What is GE Capital's edge? One is its association with GE, which allows it to borrow money cheaply, typically around 6% in 1992, thanks to GE's AAA credit rating. But most important is a culture that successfully blends an entrepreneurial spirit with the hard-driving and intensely competitive focus of its parent. That translates into an obsession with performance, an ability to shift strategies rapidly to take advantage of change, an appetite for risk-taking and dealmaking, and an engineer's yen to run operations, not just write a check to finance them. GE Capital has a manufacturing mind-set that views money as a raw material to be machined into a service that can be marked up and sold for a profit.

GE Capital's culture, indeed, is the antithesis of the plodding, risk-averse attitude that pervades most banks. GE Capital, for instance, is eager to seize a deadbeat's assets and run them--better. "We don't want to be commodity providers of money," says Chief Executive Gary C. Wendt. "I just think we have a different attitude because we're part of an operating company."

HIGH EXPECTATIONS. It is Wendt, 50, a professionally trained engineer, who sets the style at GE Capital's utilitarian headquarters in Stamford, Conn. He displays a thinly disguised contempt for his banking competitors. "We can't earn the same kinds of returns that banks do, otherwise GE won't keep us around," says Wendt, a devotee of the tough management style of his boss, GE Chairman and CEO John F. Welch Jr. As one of General Electric's 13 businesses, GE Capital is expected to rack up an average 20% return on equity, a target that vastly eclipses the banks' average of 13%. To do so, GE Capital relies on its diverse operations. The company makes money in a variety of ways: fees from leasing activities, premiums from insurance operations, interest income from lending, and investment returns from real estate deals.

Wendt sets a high bar for his managers to reach, and they, in turn, demand the same of their subordinates. "Life is staying one step ahead of the posse--that's what I tell my managers," says Edward D. Stewart, one of three executive vice-presidents who report to Wendt. And what of those who can't cut it in such a supercharged atmosphere? Stewart's half-joking response is the baseball umpire's jerked thumb: Yer out.

How long can GE's money machine keep rolling? Some observers have predicted for years that its relentless drive for growth would lead it to make mistakes. Indeed, in 1992 it wrote off $1.25 billion in bad loans and other failed dealings, down a little from $1.3 billion in 1991 but far above the $800 million posted in 1990. There are plenty of potential pitfalls. The global airline recession could leave it with scores of unleasable airplanes, or the ever-chancy insurance market could sideswipe Employers Re. Its ability to acquire bargain-basement assets from troubled competitors will be lessened as the economy recovers, forcing it to rely even more on squeezing extra profits from existing assets.

Further, as the company focuses more of its expansion efforts overseas, it could fall prey to the vagaries of foreign economies. Still, most GE Capital watchers remain convinced that its enormous breadth and skilled management will keep it humming with the slick efficiency of a GE turbine. Marvels Lawrence Connell, chief of the Hartford-based Society For Savings and a former regulator: "They're the major finance company in the country right now."

More than any other factor, GE Capital reached that position with a singular focus on performance. Its managers can expect--and must meet--stiff standards that are set by Wendt. One key is to outwit competitors by moving faster, buying cheaper, and servicing customers quicker. Another is dealing with problems the minute they crop up. The overall goal is to get the business to grow at a double-digit annual rate. "There's an absolute obsession with growth," says James A. Parke, GE Capital's senior vice-president for finance.

'800-POUND GORILLA.' Business managers gather four times a year for face-to-face meetings with Wendt and the other top executives. At these so-called "war games," three-year strategies are laid out. Operating plans for the current year are checked and adjusted, if need be. Business development staffs within the individual units are constantly searching for new opportunities. Ideas bubble up from the bottom: potential acquisitions often surface first among salespeople in the field. "There's this natural drive to find something new to do, to take advantage of the competition, to build your business," says Dennis J. Nayden, an executive vice-president.

At the moment, its competitors have almost ceded the field to GE Capital. Banks, fearful of regulators, don't want to lend. Insurers, afraid of runs from policyholders, are adding reserves to offset deteriorating real estate portfolios. And industrial companies with finance arms, pressured by irate shareholders, are returning to their core businesses. GE Capital is using this environment to gobble up assets from weakened rivals and expand its reach. "They're one of the few buyers when everybody else is selling," says analyst George Fraise of Smith Barney, Harris Upham & Co. "GE does this better than anyone else."

GE Capital is a prime source of funds for troubled companies. Consider Volvo, whose financial troubles were starting to affect the Swedish company's ability to finance the leasing of its vehicles. In the U. S., Volvo's debt had been downgraded, hurting its ability to raise capital. Volvo's unhappy choice: try to please Wall Street by raising lease rates in a bid to expand revenue or soldier on, paying higher interest rates and lowering the profit it made. "We would have been pinched," acknowledges Volvo Car Finance President Michael T. Duke. Along came GE. With its ability to raise capital cheaply, GE Capital was able to structure a joint-venture deal that once again allows Volvo to compete with aggressive lease rates for its cars. "GE is clearly the 800-pound gorilla," says Duke. "They're the first guys you turn to."

BURNOUT INSURANCE. GE Capital is always prowling for new businesses to expand into. In the past, its Genstar shipping container leasing unit, along with other lessors, sold old containers to scrap merchants. Then one day, employees at a Genstar facility got the idea of reconditioning the containers for use as portable warehousing facilities at ports and industrial sites and as storage space for retailers' excess inventories. The business, called Instant Space, is now a global operation that has grown to the point where GE Capital is a regular buyer of containers from steamship lines.

Productivity is a key facet of GE Capital's drive for performance and is constantly being measured. "We have one-fifth the corporate overhead per asset that we had seven or eight years ago," brags Wendt. When Chrysler Credit Corp. ran a $500 million equipment-leasing business, it had 100 employees. GE Capital bought the operation but left behind all the people. GE Capital has a whole set of systems to boost productivity. Process mapping, the system by which managers can track how many steps it takes to perform a given task, is much in vogue.

So are such GE concepts as "workout," where employees confront managers over bureaucratic inefficiencies and suggest solutions. At GE Capital's auto-leasing business outside Chicago, says manager Sandra L. Derickson, employees get questions like: "How many credit apps can a credit manager process? How many dollars can a collector collect every month?"

Wendt appears to appreciate that this type-A environment can lead to burnout. So he doles out plenty of corporate benevolence in order to take the edge off. GE Capital's auto leasing operation, for instance, offers flexible working schedules and provides transportation to a local day-care center for mothers who bring their children to work. Workers sometimes receive $100 "management reward" checks for handling a difficult customer or solving a thorny problem.

HOLY NUMBERS. A crucial part of the productivity drive is that GE holiest of holies--numbers. GE Capital has a huge cadre of well-trained number-crunchers, many of them graduates of its parent's famed financial management programs. "We watch numbers like a hawk," says Executive Vice-President Stewart. "It's part of the GE culture. It doesn't take long to spot something that pops up out of trend."

GE Capital's number-crunching prowess has been especially helpful in its negotiations with troubled financial institutions eager to unload assets. In the past couple of years, GE Capi-tal has been a hungry acquirer of huge real estate portfolios from Resolution Trust Corp., the federal agency in charge of cleaning up the S&L quagmire. "They were very astute and well-informed buyers who were generally ahead of everybody else," says former RTC head L. William Seidman. By having the financial muscle to make bulk purchases, such as a $1 billion portfolio that included some Florida strip shopping centers, GE Capital can bag RTC property much more cheaply than the agency's going rate, which is 40 to 70 on the dollar. According to Lewis Goodkin, a Florida real estate expert, GE Capital grabbed some properties for 20 on the dollar.

The RTC deals also illustrate GE Capital's agility in taking advantage of market changes, another hallmark of its operating style. A decade ago, it was a major lender on commercial property deals, concentrating on existing buildings with good track records. Today's rotten real estate market has provided different opportunities. Even more active than it once was, GE Capital is buying up properties burdened by excessive debt loads. It can afford to refinance the buildings, manage them, and then await the turn in the property market cycle. Then, GE Capital plans to sell the buildings to institutional investors.

A look at the mix of businesses that make up GE Capital shows just how it continually shifts business focus to create a diversified portfolio in which thriving divisions more than offset faltering ones. In 1987, nearly one-fifth of GE Capital's $600 million profit came from leveraged buyouts, while leasing such things as truck trailers, shipping containers, and railcars produced only $25 million in earnings. Four years later, problems in LBO lending led GE Capital to take the $1.3 billion write-off. But it was the asset-management businesses, including leasing, that kicked in, yielding more than $300 million in income.

Patience also pays off. While the 1986 purchase of Kidder hasn't been the home run GE Capital envisioned, it finally has managed to redeem itself. After years of underperformance, it had a good 1992, with operating earnings of about $300 million. The unit, which has been for sale, at least is now a more desirable property.

FIELDWORK. Moving quickly to deal with problems is also a GE Capital hallmark. In 1990, Vendor Financial Services, a unit that finances other manufacturers' equipment, was limping along--a low-growth outfit making less than $10 million on its $1 billion in assets. GE Capital tapped Thomas H. Mann, who had performed ably at GE Capital's mortgage-insurance operation, to beef up the business. Rather than battle rivals for the same share of the pie, Mann went after a much bigger potential market: equipment that manufacturers were financing themselves. "We cold-called them," he recalls. Since this area was not a profit center for the manufacturers, GE Capital argued that it could do the job better. Even Jack Welch volunteered his assistance, putting in a pitch with Eastman Kodak Co. executives to seal last year's $1 billion purchase of the financing portfolio for Kodak's office-equipment arm. In 1992, Mann's unit earned about $45 million on assets, which have more than tripled to $3.5 billion. But Mann's superiors aren't about to let him rest on his laurels. His income target this year is at least $60 million.

GE Capital is also performing a strategy about-face in corporate finance, where Stephen Berger, GE Capital's executive vice-president and the former executive director of the New York Port Authority, is trying to build a book of business in the post-LBO lending environment. The emphasis is on due diligence and not just dealmaking. "They spent days out in the field," says Linda J. Wachner, CEO of Warnaco Inc., for whom GE Capital led a syndicate that provided $350 million in term loans and revolving credit. "We have over 25 facilities, and they met with every member of senior management."

GE Capital's experience with its own soured loans has helped it exploit new business opportunities. It has moved into bankruptcy financing, a booming market created by busted LBOs. Last year, in one of its biggest deals, Berger's unit lent the department store chain Carter Hawley Hale Stores Inc. $225 million to finance its plan of reorganization from bankruptcy. GE Capital is even trying its hand at running the businesses of its former creditors. It now owns and operates Shoe Town, which it took over after store chain's loans went bad in 1991. "Our goal is to turn it around, improve the numbers, and then sell it," says Berger. "We are not going to be in the shoe business."

Dealing effectively with problem assets has helped GE Capital reduce the amount of its nonperforming and underperforming assets to $1.4 billion at yearend 1992, down from $2.2 billion at its peak in June, 1991. An example of its quick action philosphy: When Eastern Air Lines Inc. collapsed, GE Capital's Polaris Aircraft Leasing operation got stuck with a handful of Boeing 757s. Polaris executives discovered that USAir Inc. wanted some of the widebody planes but had McDonnell Douglas MD-80s leased from Polaris that it no longer needed. So GE released the 757s to USAir, taking the MD-80s back and leasing them in a new deal to a Chinese carrier.

SERVICE ON THE FLY. What helps GE Capital managers in situations like these is a deep reservoir of operational experience, some of it drawn from the ranks of parent GE. GE Capital has a team of more than 100 engineers who work on location at GE-financed industrial projects, such as power plants in Asia. In its commercial equipment financing unit, which leases more corporate aircraft than anyone else, many of the salespeople are licensed pilots. GE Capital's railcar leasing outfit even runs six wheel-repair shops around the country, giving it a big edge over competitors.

The drive to add value to assets, not just finance them, is ongoing. In a backroom office in Eden Prairie, Minn., 65 former auto and truck mechanics answer phone calls 24 hours a day from drivers of vehicles whose companies have leased vehicles from GE Capital. At the flick of a switch, a phone clerk can call up a computerized history of the vehicle and help diagnose a potential problem. With the information, the clerk can steer the driver to the nearest garage that can handle the defect. A GE Capital employee will even negotiate the lowest possible repair price.

In another part of the building, a handful of GE Capital employees will arrange to get the tags for any of its customers' vehicles, no matter what the state. Such services, for which GE Capital customers pay fees, are all part of a value-added approach to asset financing. "For every $1 in fee that they pay, we estimate we can save them $4 to $4.50," says auto-fleet chief Teresa M. LeGrand. Added features like tag delivery and auto service diagnosis helped the auto fleet unit, which barely broke even in 1987, turn an $80 million profit last year.

This may seem far removed from the glorified world of high finance. But it's all just part of a restless corporate culture that seems to thrive on continually shaking itself up. "Change," says CEO Wendt. "You make it an exciting thing rather than a threatening thing." So far, at least, the excitement at GE Capital has kept the potential threats at bay.GE CAPITAL SERVICES'